C.D. Barnes Associates, Inc. v. Grand Haven Hideaway Limited Partnership et al

Filing 534

OPINION; signed by Judge Robert J. Jonker (Judge Robert J. Jonker, ymc)

UNITED STATES DISTRICT COURT W E S T E R N DISTRICT OF MICHIGAN S O U T H E R N DIVISION

C .D . BARNES ASSOCIATES, INC., P la in tiff /C o u n te r-D e f e n d a n t, C A S E NO. 1:04-CV-850 v. H O N . ROBERT J. JONKER G R A N D HAVEN HIDEAWAY LIM IT E D PARTNERSHIP, et al., D e f e n d a n ts . __________________________________/ O P IN IO N I n tr o d u c t i o n T h is case arises out of a HUD-insured real estate project (the "Project") that failed b e f ore completion. Parties include, among others, C.D. Barnes ("Barnes"), the general c o n trac to r; the United States Department of Housing and Urban Development ("HUD"); C e n te n n ia l Mortgage, Inc. ("Centennial"), a HUD-approved mortgage lender; Grand Haven H id e a w a y Limited Partnership ("GHHLP"), a Delaware limited partnership and the owner o f the Project; Richard George and Carey Boote, two of the limited partners in GHHLP; and Q T C Company ("QTC"), the eventual general partner of GHHLP. W h e n the Project failed, HUD, as the insurer, paid Centennial's claim of a p p ro x im a te ly $9.5 million, took possession of the Project, and sold it at foreclosure for a p p ro x im a t e l y $9.1 million. Barnes asserts that at the time HUD took possession, the

P ro je c t included not only value for which GHHLP had paid through loan disbursements f ro m Centennial, HUD's assignor, but also additional value for which it had not yet been p a id . According to Barnes, this additional value lay primarily in a 10% retainage, or h o ld b a c k , which was to be paid upon the completion of the Project, and in additional work a p p ro ve d and undertaken but not paid for due to GHHLP's failure to meet an escrow c o n d itio n HUD imposed. Barnes seeks to recover the unpaid value from some or all of H U D , Centennial, GHHLP, QTC, Mr. George and Mr. Boote. Each of these targets has m o ve d for summary judgment, and Barnes has moved for partial summary judgment. F a c tu a l Background 1. G H H L P is formed to own the Project; HUD and Grand Haven Township each a p p r o v e the Project following controversy. T h e Project was conceived as a 19-building development of luxury apartments to be c o n stru c ted in Grand Haven, Michigan. GHHLP was formed to own the Project. Initially, G H H LP had five partners: M.J. Benzer Co., the general partner, represented by Michael B e n ze r; and Robert DeJonge, Charles Luyendyk, Mr. George, and Mr. Boote, all limited p a rtn e rs. In late 2000 or early 2001, GHHLP acquired the real estate in Grand Haven T o w n s h ip on which it intended to develop the Project. GHHLP wished to develop the p ro j e c t through a HUD program created under Section 221(d)(4) of the National Housing A c t, 12 U.S.C. § 1715l(d)(4) ("Section 221(d)(4)"). Unlike most HUD programs, Section 2 2 1 (d )(4 ) is available to for-profit mortgagors, and developments under the program are not
2

re s tric te d to low or moderate-income tenants. In administering Section 221(d)(4), HUD typ ic a lly works with third-party lenders, following a protocol set forth in HUD's MultiF am ily Accelerated Processing Guide (the "MAP Guide"). Such lenders are sometimes c a lle d "MAP lenders." HUD tightly controls most aspects of Section 221(d)(4) transactions, a u th o rin g the governing documents and prescribing the terms, conditions and standards for f in a n c in g and for construction payments. A HUD inspector periodically visits the

c o n s truc tion site to monitor construction progress. The Project encountered difficulties throughout the spring and summer of 2002, well b e f o re construction began. Initially, HUD determined that the Project was not financially f e a sib le and denied GHHLP's application to participate in the Section 221(d)(4) program. A ro un d the same time, Grand Haven Township objected to various aspects of the Project p la n s . In light of HUD and Grand Haven Township's concerns, GHHLP revised its a p p lic a tio n to HUD as well as the Project plans. Changes within GHHLP also occurred a ro u n d this time. Messrs. DeJonge and Luyendyk, for various reasons, each withdrew from th e partnership. Barnes, which had agreed to serve as general contractor for the Project, also a gre e d to participate in HUD's Builder and Sponsor's Project and Risk Allowance Program (" B S P R A " ). BSPRA requires an identity of interest between the Project owner and the b u ilde r; accordingly, Barnes took a 1% limited partnership interest in GHHLP. Despite internal disagreement at HUD about the viability of the Project, HUD u ltim a te ly approved the revised application. Grand Haven Township also approved revised

3

P ro j e c t plans. In late July, 2002, HUD agreed to guarantee a loan of $14,822,400, to be a d v a n c e d by Centennial, a MAP lender. Consistent with Section 221(d)(4) Program

c o n d itio n s , HUD controlled the arrangements of the transaction. HUD required, among o th e r things, that: the mortgage loan be non-recourse; GHHLP be a single-asset owner; the m o rtga ge be a first lien on the property; and that Barnes and its subcontractors waive any r ig h ts to construction liens on the property. HUD also required GHHLP to obtain two s e c u re d letters of credit, one for $296,448, to address the costs of equipping and renting the P ro j e c t to completion of construction, and the other for $343,003, for additional lease-up e x p e n s e s . Messrs. George and Boote personally guaranteed these letters of credit. 2. C o ns tr u c tio n begins; unforeseen costs emerge, and delays occur. T h e HUD loan closed on October 22, 2002, and construction began soon after. P a ym e n ts to Barnes began to flow in accordance with the MAP process. Under the MAP p ro c e s s , the MAP lender disburses the construction loan in the form of monthly advances. O w n e r and lender approvals precede each disbursement: the contractor submits a requisition form to the project owner, who ordinarily approves it and sends it to the lender along with a form requesting the disbursement of the loan advance to pay the contractor. The lender n o r m a lly approves these forms and disburses the advance. In calculating the amount re q u e s te d each month, the contractor subtracts a 10% retainage, or holdback, to be paid only a f te r completion of the project and a related cost certification. Although the contractor

4

c a lc u la te s the retainage cumulatively throughout construction, no retainage funds are set a s id e , but rather simply are not disbursed. As construction of the Project got underway, unforeseen challenges quickly arose. M e s s rs. George and Boote soon learned that, unbeknownst to them, over approximately $ 15 0,0 00 in architectural and engineering costs had been omitted from the Project budget s u bm itte d to and approved by HUD. Messrs. George and Boote claim that Mr. Benzer o m itte d these costs deliberately despite his knowledge that the partnership had insufficient f un ds to pay them. Also shortly after construction began, Grand Haven Township required th e immediate installation of permanent access roads and underground utilities for the c o n s tru c tio n site. Barnes had not anticipated this requirement, which increased costs and d e la ye d construction. Costs also rose significantly due to a miscommunication concerning the Project plans. T h e Project plans Grand Haven Township earlier had seen featured cultured stone in the e x te rio r of all the buildings. As the plans were revised, the cultured stone was eliminated, b ut the Township did not realize this. The Township had hired an outside service to review th e final plans for building code compliance. Not knowing that the cultured stone was im p orta n t to the Township, and viewing it simply as an aesthetic issue, the outside service a p p ro ve d the plans, and the Township issued a building permit. When the Township learned o f the elimination of the cultured stone, it insisted that the plans be revised to reinstate it. A d din g the cultured stone increased the costs of construction by at least $300,000 or more.

5

3.

F in a n c ia l worries exacerbate tensions within GHHLP; Messrs. George and B o o te notify Centennial of concerns. Likely cost overruns increased quickly. Meanwhile, new financial projections for the

P ro j e c t forecasted a darker future than originally anticipated. Early in the summer of 2003, J o h n Drozer, the president of Barnes, met with Messrs. Benzer, George and Boote to discuss th e Project's cost overruns. The meeting was inconclusive. Tension among the partners in G H H LP intensified. In May, 2003, Mr. George met with Centennial to seek its assistance in addressing growing financial worries. He contacted Matt Kane, president of Centennial, a ga in in June 2003, expressing concern that GHHLP might default on its loan unless more c a p ita l became available. Mr. Kane indicated to Messrs. George and Boote that he would in fo rm HUD of GHHLP's financial difficulties, but he did not actually do so for several m o n th s . In June, 2003, Mr. Benzer tendered his resignation as general partner of GHHLP. However, Messrs. George and Boote elected not to accept his resignation. Rather, they vo lun tee red to take on some of the responsibilities Mr. Benzer had been performing. M r. Boote began to serve as the primary liaison with Barnes and the project manager. M r. George assumed responsibility for paying bills. Barnes's monthly draw requests

c o n tin u e d to go to Mr. Benzer for his review, then on to Mr. George for signature. The H U D transaction documents prohibited changing the general partner without HUD's prior a p p ro va l. Although Mr. Benzer claimed that he had resigned as general partner in June of

6

2 00 3, HUD did not approve his resignation, nor did Messrs. George and Boote accept it at th at time. C o s t overruns and change orders continued to concern the GHHLP partners and B a rn e s , and they continued to discuss without resolving these issues. On September 5, 2 0 0 3 , Barnes requested that GHHLP place in escrow sufficient funds to cover the cost o ve rrun s , but eventually withdrew its request and continued working on the Project. 4. H U D learns of the Project's struggles; October and November meetings are i n c o n c lu s i v e . A progress and draw meeting took place at the Project site on October 30, 2003. J o h n Straatsma, who directs HUD's Grand Rapids Multifamily Housing team, attended this m e e tin g. Afterward, he notified his supervisor, Robert Brown, HUD's Michigan HUB d irec to r, that the Project faced cost overruns totaling approximately $700,000 and could in vo lve further delays. Concerned about the Project's status, Centennial and HUD invited a ll parties associated with the Project to meet on November 18, 2003, at the Project site. At th is meeting, HUD was surprised to learn of Mr. George's worry that the Project might not b e viable long-term. HUD, Centennial, and Messrs. Benzer, Boote and George later excused B a rn e s and continued the meeting. The owners shared with HUD and Centennial revised re n ta l projections reflecting a negative cash flow for the Project. There was some

d isa gre e m e n t about the reliability of the projections, but all agreed that the Project was in tro ub le . The owners indicated to HUD that they were seeking additional equity through new in ve s to rs or through a sale of the Project.
7

5. T h e situation worsens; Barnes contemplates stopping work; March discussions f a il to resolve the problems; and changes in the limited partnership occur. Over the next few months, the owners of the Project, with assistance from Centennial, d ilige n tly sought new investors or a buyer for the Project. Messrs. George and Boote also in q u ire d about increasing the mortgage or using the letters of credit to help fund the cost o ve rru ns . At the same time, many of the cost overruns converted to change orders, which H U D , Centennial and GHHLP processed. This group of change orders totaled

a p p ro x im a te ly $231,000. HUD refused to allow disbursements for these change orders u n le s s GHHLP placed in escrow the same amount. Although HUD had not raised the issue b e f o re , it noted that the transaction documents required that the loan be kept in balance, with s u f fic ie n t funds to complete the Project always available. HUD also refused to allow the p a rtie s to use the letters of credit to fund the change orders. O n March 26, 2004, Barnes requested payment of its February draw, noting that it m igh t have to cease work on the Project in the absence of payment. Mr. Straatsma and Mr. K a n e called Mr. Drozer on March 29, 2004. Seeking to keep Barnes from stopping work o n the Project, Mr. Straatsma told Mr. Drozer that HUD was trying to find a way to pay B a rn e s . Mr. Drozer understood Mr. Straatsma to be saying that HUD would assure that B a rn e s was paid. Mr. Drozer does not recall any specific comments from Mr. Kane, but he in te rp re te d Mr. Kane's silence as agreement with Mr. Straatsma. In light of the Project's continued struggles and discouraging financial projections, M r. George finally determined to abandon his interest in the Project. On March 30, 2008,
8

G H H LP approved Mr. George's abandonment of his partnership interest. At the same time, G H H L P approved the resignation of M.J. Benzer Co. as general partner, and the admission o f QTC Company, a company Mr. Boote had created for this purpose, as successor general p a rtn e r. 6. C e n te n n ia l declares GHHLP in default; HUD accepts assignment of mortgage a nd sells the Project in foreclosure. A lso in late March, 2004, Mr. Drozer notified GHHLP that Barnes would stop work o n the Project unless GHHLP arranged funding for approved change orders and monthly d ra w requests. On April 9, 2004, Centennial formally declared GHHLP in default, citing th e partnership's failure to pay the March interest on the loan and its failure to obtain HUD's a p p ro va l of the replacement of the general partner. Mr. Straatsma and Centennial continued to try to find a way to keep the Project afloat. But on April 20, 2004, Mr. Straatsma advised M r. Drozer that the Project was in default and that Barnes should cease its work and s p e n d in g on the Project. Barnes did, though, spend approximately $122,000 in suspending w o rk , cleaning up, taking inventory and securing the Project. O n June 25, 2004, Centennial assigned the mortgage to HUD. Before assigning the m o rtga ge , at HUD's instruction, Centennial applied the balance of GHHLP's letters of c re d it, totaling $586,821.33, to the outstanding loan amount. Only after that did Centennial th e n file its insurance claim with HUD. On October 22, 2004, HUD accepted the

a ss ign m e n t of the mortgage and paid Centennial the amount outstanding. HUD foreclosed o n the Project and sold it for approximately $9.1 million.
9

B a rn e s claims that at the time of the foreclosure sale, the Project included at least $2.2 m il lio n in embedded uncompensated value contributed by Barnes and its subcontractors. O f course, the actual amount of such value, if any, is a disputed question of fact. P r o c e d u r a l Background B a rn e s filed this lawsuit late in November, 2004, in state court, and in December, 2 00 4, HUD removed the case to federal court. On December 23, 2005, Judge Quist issued a n opinion granting in part and denying in part a series of dispositive motions in the case. H is opinion held, among other things, that the Multifamily Mortgage Foreclosure Act, 12 U .S .C . §§ 37.01-17 preempts state construction lien law in this case and that HUD, as the h o ld e r of the mortgage, which was first in time, has a statutory priority to foreclosure p ro c e e d s . But Judge Quist suspended distribution of the proceeds pending evaluation of B a rn e s 's equitable claims. Barnes filed a Fourth Amended Complaint in June, 2006. A u gu st, 2007, the case was reassigned to me. P a rtie s in the case have filed a series of dispositive motions, outlined in the following c h a rt: In

10

C o u n t of the Complaint

HUD

C e n t e n n ia l

G H H LP

G P1 (G e ne ra l P a rtne rs) earlier

B o o te

G eorge

C o un t 1 Fo re c lo su re of Construction L ie n C o un t 2 B re a c h of Contract

[ - - -- -- -- -- --

------------ Resolved

by No M o tio n s P e n d in g

O p in io n

- -- -- -- -- ]

[ - - -- -- -- -- --

------ N/A -----------]

[ - - -- -- -- -- -- -

­ N/A --

- -- -- -- -- ]

C o un t 3 E q u ita b le Lien / Constructive T rust C o un t 4 T h ir d - P a r ty Beneficiary C o un t 5 U n ju st enrichment

[ ---------

C r o ss Motions P e n d in g

- -- -- -- -- -- ]

[ - - -- -- -- -- -- -

­ N/A --

- -- -- -- -- ]

[---- Cross

M o tio n s Pending---]

[ - - -- -- -- -- -

---- N/A --

- -- -- -- -- -

- -- -- -- -- ]

[ ------------

C r o ss Motions P e n d in g

- -- -- -- -]

[ - - -- -- -- -- -- -

N /A ---

- -- -- -- -- ]

C o un t 6 Q u a n tu m Meruit

[ ------------

C r o ss Motions P e n d in g

- -- -- -- -- -- ]

[ - - -- -- -- -- -- -

N /A ---

- -- -- -- -- ]

C o un t 7 P ro m iss o ry Estoppel / E q u ita b le Estoppel C o un t 8 N e glige n t and/or Innocent M i s r e p r e s e n t a ti o n

[ ------------

C r o ss Motions P e n d in g

- -- -- -- -- -- ]

[ - - -- -- -- -- -- -

N /A ---

- -- -- -- -- ]

D is m is s e d b y earlier o p in io n

[ --- Cross Motions Pending

- -- -- -- -- -- ]

[ - - -- -- -- -- -- -

N /A ---

- -- -- -- -- ]

C o un t 9 L ia b ility of Limited Partners

[ ------------

­ -------- N/A -------

-----------

-------------]

SJ M o tio n P e n d in g

SJ M o tio n P e n d in g

C o u n t 10 B r e a c h of Fiduciary Duty by G e n e r a l Partners

[ - - -- -- -- -- --

---------- N/A -------

- -- -- -- -- -- ]

[ - - -- -- -- -- -- -

SJ M o tio n P e n d in g

- -- -- -- -- ]

M.J. Benzer Company was the general partner from the limited partnership's inception until M a rc h 30, 2004, when GHHLP approved the resignation of M.J. Benzer Company as general p a r tn e r . At that point, QTC Company became the successor general partner in GHHLP. The Court h a s no record of M.J. Benzer Company moving for summary judgment in this matter. 11

1

C o u n t 11 Fra u d and Misrepresentation

[ - - -- -- -- -- --

------- N/A ---------]

[ - - -- -- -- --

SJ Motion P e n d in g

----------

- -- -- -- -- ]

C o u n t 12 A c c o u n t Stated

[ - - -- -- -- -- --

------- N/A ---------]

No M o tio n s P e n d in g

[ - - -- -- -- -- -- -

N /A ---

- -- -- -- -- ]

C o u n t 13 Q u a n tu m Valebant

[ ------------

C r o ss Motions P e n d in g

- -- -- -- -- -- ]

[ - - -- -- -- -- -- -

N /A ---

- -- -- -- -- ]

C o u n t 14 A c tio n Against HUD for U n d isb u rse d Mortgage P ro c e e d s Pursuant to the N a tio n a l Housing Act, 12 U .S .C . § 1701 et seq.

C ross M o tio n s P e n d in g

[ - - -- -- -- -- -­ - -- -- -- -- --

----------

N /A -------

- -- -- -- -- -

- -- -- -- -- ]

T h e Court has heard oral argument on the motions, and its decision follows below. L e g a l Standard S u m m a ry judgment should be granted if there is no genuine issue of material fact and th e moving party is entitled to judgment as a matter of law. Parks v. LaFace Records, 329 F .3d 437, 444 (6th Cir. 2003) (citing FED. R. CIV. P. 56(c)). A genuine issue of material fact e x is ts if the evidence is such that a reasonable jury could return a verdict for the nonmoving p a rty. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In deciding a motion for s u m m a ry judgment, the Court views the evidence and draws all reasonable inferences in f a vo r of the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 5 7 4 , 587 (1986). But that does not mean that any amount of evidence, no matter how small, w ill save a nonmoving party from losing on a motion for summary judgment. Scott v.

12

H a r r is, 127 S. Ct. 1769, 1776 (2007). When the nonmoving party's version of the facts is " b l a t a n tly contradicted by the record, so that no reasonable jury could believe it, a court s h o u ld not adopt that version of the facts for purposes of ruling on a motion for summary ju dgm e n t." Id. Core Equitable Claims B a rn e s raises several equitable claims against HUD, Centennial and GHHLP (Counts III; V; VI; VII; XIII; and XIV), and each of these defending parties has moved for summary j u d gm e n t on those claims. E q u ita b le Claims against GHHLP A construction contract already governs the relationship between GHHLP and Barnes in this matter. Barnes's remedy against GHHLP lies in contract, and Barnes is not entitled to equitable relief against GHHLP. Accordingly, the Court will grant summary judgment to GHHLP as to Counts III; V; VI; VII; VIII; and XIV. Barnes's claims against GHHLP for b rea c h of contract and account stated, Counts II and XII in this case, remain pending. E q u ita b le Claims against HUD and Centennial B arn es's equitable claims form the core of its case against HUD and Centennial. B a rn e s asserts under a variety of equitable theories that HUD and Centennial have, in e s s e n c e , received value without paying for it and therefore have been unjustly enriched. W h ile few published cases address similar circumstances under the Section 221(d)(4) p ro gra m , there exists a series of analogous cases under other, comparable HUD programs.

13

T h e leading case is Trans-Bay Engineers and Builders, Inc. v. Hills, 551 F.2d 379 (D.C. Cir. 1 9 7 6 ). Trans-Bay involved the development of real estate under Section 236 of the National H o u s in g Act. Trans-Bay, 551 F.2d at 373. HUD's approved contracts and other documents c o n trolled most aspects of the transaction. Id. at 379. The construction contract authorized th e payment of monthly draws minus a 10% retainage, which was to be paid 30 days after c o m p le tion of construction, as long as certain conditions were satisfied. Id. at 374-75. The c o n trac to r completed construction and met all conditions for payment of the retainage. Id. a t 375. HUD released half of the accrued retainage to the contractor, but refused to release th e remainder of the funds until after a final closing, which could not occur, because the p ro je c t owner had defaulted. Id. The mortgagee assigned the mortgage to HUD, and HUD f o re c lo s e d . Id. The Trans-Bay court found that HUD had been unjustly enriched by the value of c o n s tru c tio n services for which it had not paid. Id. at 382. In so concluding, the court e m p h a s iz e d that "HUD was not merely the mortgage insurer . . . it was the guiding spirit b e h in d the entire project. The record reveals a very high level of involvement by HUD." Id . at 381. The court observed that HUD inspected and approved the construction plans; th a t any changes had to be approved by HUD; that HUD inspectors monitored the progress o f construction; and that HUD drafted all the contracts used in the transaction. Id.

T h e re f o re , the court reasoned, "[i]t is neither fair nor realistic to treat HUD as a mere m o rtga ge insurer in this transaction, defining its exposure solely on the basis of the mortgage

14

in su ra n c e document . . . [t]his was not a typical marketplace transaction." Id. The court h igh ligh te d the unique exposure of the general contractor in the case, commenting that the m o rtga ge company was fully insured on its loan by HUD; HUD had the remedy of f o re c lo s u re ; and that the project owner's losses were limited to the project itself. Id. at 382. In contrast, the contractor alone lacked protection. Id. The court concluded that HUD had b e e n unjustly enriched, that the contractor was entitled to equitable relief, and that the u nd is b urs e d mortgage proceeds constituted an identifiable res on which an equitable lien c o u ld be placed. Trans-Bay differs from the case before the court in that the project owner was a nonp ro f it corporation developing a project intended for low and moderate income tenants, and in that the contractor completed construction. Two more factually similar cases, though a ris in g under HUD's Section 236 program, are S.S. Silberblatt, Inc. v. East Harlem Pilot B lo c k Building 1 Housing Development Fund. Co., 608 F.2d 28 (2d Cir. 1987), and Spring C o n s tru c tion Co. v. Harris, 562 F.2d 933 (4th Cir. 1977). In each of these cases, the owner d e f a u lte d before the contractor completed its work. See Silberblatt, 608 F.2d at 31; Spring C o n s tr u c tio n , 562 F.2d at 935. In Silberblatt, the lender declared the owner in default after c o m p le tion of approximately 90% of the construction. Id. at 33. The contractor alleged that th e undisbursed mortgage proceeds constituted a fund that could be attached, and it sought to recover the accrued retainage as well as other amounts for completed work. See id. at 41. T h e court held that the contractor was entitled to equitable relief even though HUD did not

15

re c e ive a completed structure, because HUD still received a benefit in the form of goods and m a te rials worth 10% (the retainage amount) more than the amount paid to the contractor. S e e id. at 37. S im ila rly, in Spring Construction, the court found that the contractor was entitled to e q u ita b le relief, even though it did not complete the project, and even though HUD sold the p ro je c t at a loss, as in this case. Id. at 937-38. The court found an identifiable res for the im p o s itio n of a lien in two respects: first, the accrued retainages; and second, the balance of u n d is b u rs e d loan proceeds that were intended to compensate those who constructed the p ro je c t. Id. at 937. Although the Spring Construction court cited Trans-Bay, the court did n ot specifically focus on the special features of the Section 236 program that the Trans-Bay c o u rt had cited as additional considerations in imposing an equitable lien. H U D relies primarily on two cases, Van-Tex, Inc. v. Pierce, 703 F.2d 891 (5th Cir. 1 9 8 3 ), and Taylor Woodrow Blitman Construction Corp. v. Southfield Gardens Co., 534 F . Supp. 340 (D. Mass. 1982), to support its contention that Barnes has no right to an e q u itab le lien. Taylor Woodrow Blitman arose under § 236. The Court denied the

c o n tra c to r's claim that HUD had been unjustly enriched, because the contractor had re m e d ie s at least available to it. Id. at 347­48. Taylor Woodrow Blitman differs

s ign if ic a ntly from this case, however, because the construction contract in that case allowed th e contractor to file a lien for non-payment. Id. at 348-49. The Taylor Woodrow Blitman

16

c o u rt also reasoned that in contrast to Trans-Bay, the owner was "not an assetless, non-profit c o rp ora tio n , but a presumably credit-worthy one." Id. at 348. V a n-T e x involved HUD's 221(d)(4) program. In Van-Tex, the mortgage lender re gu la rly advanced to the contractor construction funds minus a 10% retainage. Van-Tex, 7 03 F.2d at 893. Around the time construction was substantially completed, the owner d e f a u lte d . Id. at 894. Ultimately, HUD took ownership of the property, and sold the p ro p e rty at a loss. Id. Because the owner had defaulted, the retainage was never paid out. Id . The Van-Tex court distinguished the factual scenario before it from that in Trans-Bay, h o ld in g that because the contractor in Van-Tex had available to it other remedies, the c o n tr a c to r was not entitled to equitable relief. Id. at 897. The court pointed out that the la rge s t general partner in the project owner had substantial assets and that other partners w e re presumptively solvent. Id. The court found that the contractor lacked a reasonable e x p e c ta tion that HUD would make good on any sums due it under the construction contract. Id . "So long as the owner-sponsor, unlike the typical § 236 owner-sponsor, had assets, the c o n tra c tu a l remedy remained presumptively available." Id. A more recent case significant to the Court's analysis is J.J. Deluca Co. v. United S ta te s Department of Housing & Urban Development, No. 04-4344 (MLC), 2008 WL 7 2 3 3 2 9 (D.N.J. Mar. 14, 2008) (vacated on other grounds).2 Deluca involved the

c o n s tru c tio n of an assisted living facility insured under Section 232 of the National Housing
It appears that after the decision issued, the parties entered into a settlement agreement, the te rm s of which included vacating the court's decision. 17
2

A c t, which authorizes HUD to insure loans for the development of assisted living facilities f o r the care elderly persons. Deluca, 2008 WL 723329, at *1. The contractor completed the c o n s truc tion work required under the construction contract and submitted a certificate c e rtif yin g the total cost of the construction. Id. at *3. A HUD representative disallowed a s m a ll part of the submitted amount but approved the remainder. Id. But the contractor did n ot receive payment, because the lender declared the owner in default before HUD issued its final endorsement. Id. at *4. The contractor sued HUD, seeking to recover the difference b e tw e e n the amount HUD had certified and the amount it had been paid; costs for change o rd e rs that were deemed necessary but not approved by HUD; and applicable costs and in te re s t. Id. Noting the absence of cases addressing loans insured under Section 232, the c o u rt looked to Section 236 cases, including Trans-Bay, for guidance. Id. at *6-*8. While th e court acknowledged Van-Tex implicitly, it neither discussed nor cited that case. See id. a t *9. The court concluded that equitable relief was appropriate in light of HUD's

s ig n ific a n t involvement in the project, including its appraisals, evaluations, meetings with th e owner, structuring of the transaction, and its control over the disbursement of funds. See id . at *11. Also, as in this case, the court pointed out that HUD approved the project over in itia l recommendations to reject it. Id. at *12. It did not affect the court's analysis that the o w n e r was a for-profit entity, primarily because the owner had no assets of its own other th a n the project. Id. While DeLuca has since been vacated, following a settlement, the D e Lu c a court's reasoning offers useful guidance.

18

H U D asserts that the current situation differs significantly from that in Trans-Bay, S ilbe r b la tt, Spring Construction, and Deluca, and urges the court to follow Van-Tex. A ltho u gh HUD contends that Van-Tex essentially stands for the proposition that Trans-Bay typ e equitable relief is not available in Section 221(d)(4) cases, the case did not establish s u c h a broad rule. Rather, the court emphasized the presumptive creditworthiness of the o w n e r, noting particularly the large net worth of one of the general partners. Van-Tex left o p e n the possibility that a contractor might demonstrate that the owner ­ even a for-profit o w n e r ­ was thinly capitalized and had no other substantial assets beyond the property p ro te c ting HUD against loss. Barnes has done exactly that. L it tle basis appears for the asserted distinction between non-profit and for-profit o w n e rs in these HUD-insured transactions. The entire structure of the transaction

e n c o u ra ge s the formation of thinly-capitalized entities: (1) the owner entity is limited to a s in gle asset (to which HUD and the lender alone may look to for security); (2) the loan is n o n - r e c o u r s e , so the owners have no liability beyond any partnership assets; (3) HUD and th e lender provide almost 100% financing; and (4) the loan proceeds are the only means of p a yin g for the work on the project. See Deluca, 2008 WL 723329, at *12 ("The Court sees little difference between HUD's decision here to proceed with a Section 232 project owned a n d sponsored by an inexperienced company whose only asset was the underlying project, a n d those cases involving a Section 236 project owned and sponsored by a non-profit assetle ss organization."). GHHLP had insufficient capital to pay its creditors, and its general p a rtn e r had no assets. Further, the plan of the limited partners had been to make an initial
19

c a pita l contribution that would be repaid by the partnership at closing, so that the limited p a rtn e rs effectively would have no funds at risk in the project. This was not a typical m a rk e tp la c e transaction. T h e Court's unjust enrichment analysis applies to Centennial as well as HUD, b e c a u s e the two were so closely intertwined in this transaction. As a MAP lender,

C e n te n n ia l had HUD-prescribed obligations under HUD's MAP Guide and worked hand-inglo ve with HUD. For example, the Map lender performs a complete underwriting of the a p p lic a tio n to participate in the Section 221(d)(4) Program. While HUD approves the initial a n d final draws on the loan, the MAP lender prepares and approves the documents for draws d urin g the course of construction. Further, whether or not at HUD's instruction, Centennial a p p lie d the letters of credit to the balance of the loan, reducing the amount of the insurance c la im it filed. There was embedded value in the foreclosure rights that would not have been th ere had Centennial not applied the letters of credit, which had been designated for other p u rp o s e s . T h e re remain genuine issues of material fact for trial regarding whether, and if so in w h a t amount, HUD and Centennial have been unjustly enriched. Accordingly, the court will d e n y summary judgment to HUD, Centennial and Barnes on the core equitable claims. Third Party Beneficiary (Count IV) B a rn e s also asserts that it is entitled to relief as a third-party beneficiary of the loan a gre e m e n t between Centennial (and HUD, as Centennial's assignee), and GHHLP. Courts h a ve repeatedly held in cases involving HUD programs that a contractor in a position such
20

a s Barnes's may sue as a third-party beneficiary. Bennett Constr. Co. v. Allen Gardens, Inc., 4 3 3 F. Supp. 825, 831 (D.C. Mo. 1977) (citing Trans-Bay, 551 F.2d at 378; American Fid. F ire . Ins. Co. v. Construcciones Werl., 407 F. Supp. 164, 180-83 (D.V.I. 1975); Travelers In de m . Co. v. First Nat'l State Bank of N.J., 328 F. Supp. 208, 211 (D.N.J. 1971)); accord S p r in g Constr., 562 F.2d at 936. Under Barnes's theory, Barnes would step into the shoes o f GHHLP. However, GHHLP undisputedly defaulted on the loan. Barnes acknowledges th a t a third-party beneficiary of the loan would have no rights to disbursements following th e default, but insists that it has rights to payments under the loan that precede the default. E a rlie r cases do not support Barnes's argument, however. "[T]he lender's contractual duty to release the holdbacks . . . does not arise until construction has been completed." Van-Tex, 7 03 F. Supp. at 898 3. Because GHHLP defaulted on the loan well before construction was c o m p le te , Barnes has no rights as a third-party beneficiary under the loan agreement. Negligent or Innocent Misrepresentation (Count VIII); Fraud and Misrepresentation (Count XI) F ra u d u le n t misrepresentation requires a plaintiff to prove that (1) the defendant made a material representation; (2) the representation was false; (3) the defendant knew at the time h e or she made the representation that it was false, or the defendant made the representation re c k le s s ly, without knowledge of its truth; (4) the defendant intended that the plaintiff act o n the representation; (5) the plaintiff acted in reliance on the representation; the plaintiff

Of course, based on the Court's earlier equitable analysis, the contractual retainages may b e wholly or partially subject to distribution in equity, rather than in contract. 21

3

s u f f e re d injury due to his or her reliance on the representation. The Mable Cleary Trust v. T h e Edward-Marlah Muzyl Trust, 262 Mich. App. 485, 499 (citing Hord v. Envt'l Research In s t. of Michigan (after remand), 463 Mich. 399, 404 (2000). Silent fraud requires the e x iste n c e of a legal or equitable duty of disclosure. Roberts v. Saffell, __N.W. 2d.__ (Mich. A p p . 2008) (citing United States Fid. & Guar. Co. v. Black, 313 N.W.2d 77 (1981)). Further, "to prove a claim of silent fraud, a plaintiff must show some type of representation b y words or actions that was false or misleading and was intended to deceive." Id., (citing M & D Inc. v. McConkey, 231 Mich. App. 22, 31­32, 36 (1998)). Innocent

m is re p re s e n ta tio n requires that the following elements be satisfied: (1) the misrepresentation o c c u rre d in a transaction between the two parties; (2) the misrepresentation is false in fact a n d deceives the other; (3) the deceived party relies on the misrepresentation detrimentally; a n d (4) the loss of the party deceived inures to the benefit of the other. United States Fid. a nd Guar. Co. v. Black, 412 Mich. 99, 116-117 (1981). Judge Quist's earlier opinion dismissed Barnes's claims of misrepresentation against H U D . C.D. Barnes Assoc. v. Grand Haven Hideaway Ltd. Partnership, 406 F. Supp. 2d 8 0 1 , 810-11 (W.D. Mich., Dec. 23, 2005). As to Centennial, Barnes cannot point to any a f f irm a tive representations. Rather, Barnes argues that by keeping silent during phone calls in which Mr. Straatsma encouraged Barnes to continue working on the project, Mr. Kane ta c itly advised Barnes to continue working, even though he knew that GHHLP was at great f in a n c ia l risk. Mr. Kane's silence in this context is simply not enough to form the basis of a claim of misrepresentation, whether negligent or innocent. Barnes has not shown that
22

C e n te n n ia l misrepresented any facts or that Centennial had a duty to speak. Centennial and B a rne s were operating at arm's length, and in the absence of an affirmative m is re p re s e n ta tio n , Barnes cannot make its claim. Accordingly, summary judgment in favor o f Centennial on the misrepresentation claim is appropriate. Similarly, Barnes has adduced scant evidence to support its misrepresentation claim a ga in st GHHLP. Barnes suggests that GHHLP falsely represented to Barnes that Barnes w o u ld be paid for work inspected and approved, and that GHHLP provided Barnes with ina cc urate building plans. However, there is absolutely no evidence to suggest that GHHLP k ne w or even should have known that it would be unable to pay Barnes for work inspected o r approved, as would be required to support a claim of fraudulent misrepresentation. And in no way did GHHLP's failure to pay Barnes for work inspected and approved inure to G H H L P 's benefit, as would be required to support a claim of innocent misrepresentation. N o r has Barnes offered evidence to show that GHHLP knew or should have known that the c o n s truc tion plans were inaccurate, or that any inaccuracies inured to GHHLP's benefit. B e c a u s e Barnes has not supported essential elements of its claims of negligent or innocent m is re p re s e n ta tio n , GHHLP is entitled to summary judgment on those claims. F in a lly, Barnes has not raised a genuine issue of material fact in connection with its f ra u d and misrepresentation claim against GHHLP, QTC, Mr. George and Mr. Boote. There is no evidence to suggest that any of these parties knowingly made false representations to B a rn e s , whether through their words or actions. Accordingly, GHHLP, QTC, and Messrs.

23

G e o r g e and Boote are entitled to summary judgment on Barnes's fraud and m isre p re s e n ta tion claim against them. Claims against Limited Partners (Counts IX, X) B a rn e s asserts that Messrs. George and Boote, though they were limited partners, e s s e n tially functioned as general partners of GHHLP and so are jointly and severally liable f or the partnership's obligations. The court disagrees. Barnes is a Delaware limited p a rtn e rs h ip governed by Delaware law. See MICH. COMP. LAWS § 449.1901 (2008). Delaware law provides that if a limited partner participates in the control of the business, "he o r she is liable only to persons who transact business with the limited partnership reasonably b e lie v in g, based upon the limited partner's conduct, that the limited partner is a general p a rtn e r." DEL. CODE ANN. tit. 6, §17-303. Barnes, as a limited partner of GHHLP, had a c t u a l knowledge that neither Mr. George nor Mr. Boote was a general partner. Further, e ve n if Barnes did believe Mr. George and Mr. Boote to be general partners based on their c o n d u c t, the conduct Barnes claims inspired its belief falls within one or more safe harbor p ro vis io n s for exercising authority delegated under a limited partnership agreement or being a n agent of the limited partnership. See id., §17-303(b)(8)(o) and §17-303(b)(1). Because th e y were not general partners, and Barnes knew they were not general partners, and because in any event, their conduct fell within statutory safe harbors, Messrs. George and Boote have n o liability as general partners. Accordingly, they are entitled to summary judgment on C o u n t IX.

24

M e s s rs. George and Boote, as limited partners, and QTC, the ultimate general partner, a re also entitled to summary judgment on Count X, which alleges breach of fiduciary duties b y the general partner. Delaware law governs the duties of partners in a Delaware limited p a rtn e rsh ip . See MICH. COMP. LAWS § 449.1901 (2008). The Limited Partnership

A gre e m e n t does not provide for a fiduciary relationship among the partners, nor does the D e la w a re statute concerning limited partnerships establish fiduciary duties. Delaware's e n a c tm e n t of the uniform partnership act, DEL. CODE ANN. tit. 6 § 15-404 delineates the f id u c ia ry duties a partner owes: (a ) The only fiduciary duties a partner owes to the partnership and the other p a rtn e rs are the duty of loyalty and the duty of care set forth in subsections (b) a n d (c). (b ) A partner's duty of loyalty to the partnership and the other partners is lim ite d to the following: 1 . to account to the partnership and hold as trustee for it any property, p ro f it or benefit derived by the partner in the conduct or winding up of the p a rt n e r s h i p business or affairs or derived from a use by the partner of p a rtn e rship property, including the appropriation of a partnership opportunity; 2 . to refrain from dealing with the partnership in the conduct or w in d in g up of the partnership business or affairs as or on behalf of a party h a vin g an interest adverse to the partnership; and

25

3 . to refrain from competing with the partnership in the conduct of the p a rtn e rs h ip business or affairs before the dissolution of the partnership. (c ) A partner's duty of care to the partnership and the other partners in the c o n d u c t and winding up of the partnership business or affairs is limited to re fra in in g from engaging in grossly negligent or reckless conduct, intentional m is c o n d u c t, or a knowing violation of the law. T h e re is no evidence that Mr. George or Mr. Boote (both as a limited partner and in his c a p a c ity as president of QTC) violated any of these duties. Rather, Messrs. George and B o o te had incentive to and did try to see to it that the Project could be completed and sold. N o r did Mr. George, Mr. Boote or QTC benefit at Barnes's expense. Summary judgment f or Messrs. George, Boote and QTC on Count X is appropriate. C o n c l u s io n B a rn e s 's core equitable claims against HUD and Centennial present issues for trial, a n d the Court will therefore deny Barnes's, HUD's and Centennial's motions for summary j u d g m e n t as to those claims (Counts III, V, VI, VII, XIII, and XIV). No genuine issue of m a te ria l fact exists regarding Barnes's third-party beneficiary claim against HUD and C e n te n n ia l, and HUD and Centennial are entitled to summary judgment on that claim (Count IV ). Nor is there a genuine issue of material fact as to Barnes's claim of negligent or in n o c e n t misrepresentation against Centennial and GHHLP, and Centennial and GHHLP are e n title d to summary judgment on that claim (Count VIII). Similarly, no genuine issue of m a te ria l fact exists as to Barnes's claim of fraud and misrepresentation against GHHLP,
26

Q T C , and Messrs. Boote and George; each of these parties is entitled to summary judgment o n that claim (Count XI). There is no genuine issue of material fact concerning Barnes's c la im s of liability of limited partners and breach of fiduciary duty by general partners. M e s s rs . George and Boote are entitled to summary judgment on each of these claims (C o u n ts IX and X), and QTC is entitled to summary judgment on the claim of breach of f id u c ia ry duty (Count X). An order reflecting the Court's decision in this matter will issue separately.

Dated:

September 30, 2008

/s/ Robert J. Jonker ROBERT J. JONKER U N IT E D STATES DISTRICT JUDGE

27